It will mean a minimum tax contribution of £140,000 by someone buying a residential house costing £2 million or more and will largely affect those buying in London and the South East of the country where houses cost more.
The move comes just 12 months after the introduction of a 5% stamp duty band on homes bought for more than £1 million. But less than 0.5% of homes in Britain will be affected by the increase, according to Lloyds TSB. It estimates that just 0.2% of all home sales in Britain are worth at least £2 million and therefore subject to the new 7% stamp duty rate. Even in London, multi million pound sales account for only 1.5% of all sales.
According to the bank there are currently around 45,000 homes in Britain estimated to be worth at least two million pounds, but that number has risen by 75% over the past five years.
There were 739 million pound property sales in Great Britain in the first half of 2011 of which more than three quarters of multi million pound sales were in London.
More than half, 57%, of these transactions were in Kensington and Chelsea and Westminster. By postal district, Chelsea recorded the largest number of sales of homes worth at least two million pounds.
The number of five million pound plus properties sales increased by 48% to 77 in the first half of 2011 from 52 in the same period in 2010. Kensington and Chelsea, Westminster and Camden accounted for 86% of all such sales.
The impact of the increase in the stamp duty rate for homes sold for over two million pounds on the housing market is likely to be very limited. However, strong demand from wealthy cash rich buyers, as well as limited supply of such properties, is likely to continue to boost the level of activity at this end of the housing market,’ said Suren Thiru, Lloyds TSB housing economist.
Lucian Cook, director of Savills Research, said that his calculations based on sales recorded by HMRC show that the government will raise an extra £314 million in revenue.
He pointed out that the bulk of the new revenue will come from London and the South East and pointed out that Land Registry figures show that 73% of £2 million plus sales took place in London and 25% in Kensington and Chelsea, 15.5% in the City of Westminster and 7.5% in Camden.
But for wealthy buyers it is likely to be more of an irritation than a deal breaker, he believes.‘There will be some transactions that see prices adjusted because of it, but there are bigger forces at play in driving international demand to London in particular, and the UK transaction tax take still looks good value in a global context,’ he said.
‘I think there is much more risk that it effects the very top end of the market outside of London, which has been less robust since the credit crunch. In fact, there is a chance that it will make the upper end of the market even more reliant on wealthy international buyers who can afford to pay the tax. The domestic economy is at present less likely to generate the wealthy people who can afford to pay £140,000 to convey the title of a modest flat in the centre of London or a terraced family house in the prime inner suburbs,’ he explained.
‘Certainly, we expect to see an increase in the sales around the £2 million market that transact just below that level, because this is likely to put an artificial threshold in the market much as it does in lower tiers. That said these measures will mean that high value property is making a hugely disproportionate contribution to the tax take, and any further increases risk killing the goose that lays the golden egg,’ he added.
However, Liam Bailey, head of residential research at Knight Frank reckons there will be some tough negotiations around the £2 million level. ‘It is important to bear in mind that the prime London market has just absorbed a 42% price rise since 2009. And this came despite an uplift in stamp duty last year. It seems unlikely that the new 7% rate will result in dramatic price changes,’ he said.
‘It is when we look at evidence from previous stamp duty hikes, that we can see more issues arising from the proposed change. Higher stamp duty rates tend to mean owners stay in their properties for longer. There is a greater incentive to improve and extend properties rather than moving up the ladder. The impact of this is to reduce supply and reduce transaction volumes over time,’ he added.
He pointed out that based on the most recent HMRC date the new rate of stamp duty will raise £344 million in additional revenue for the government but this calculation assumes no change to purchaser or vendor behaviour and the final uplift in revenue is likely to be far lower.
He also pointed out that the prime country house market could benefit. ‘Wealthy London buyers looking to move on to a family house might decide to skip London, deciding that a few thousand pounds in commuting costs is worth it to buy a house at £1.9 million in the country rather than a similarly sized London property for £2.2 million, saving themselves £59,000 in stamp duty in the process,’ said Bailey.
There are concerns about the effects on more ordinary families living in London where property is prices so much higher and Sue Foxley, head of research at Cluttons, said that it will not just the wealthy that will be affected.
‘Demand for family homes is expected to rise significantly over the next five years, pushing a greater number of properties into the taxable bracket. Three and four bedroom family homes in popular London locations such as Islington and Paddington are expected to reach £2.6 million and 2.1 million in value respectively by the end of 2017, pushing them comfortably into the new tax band,’ she explained.
She added that family homes in Highbury, larger flats in Paddington and two and three bedroom flats in Pimlico are projected to be within 15% of the £2 million threshold, threatening even more households with further taxation.
‘London's global competitiveness relies on attracting the highest skilled professionals, whether from the UK or elsewhere in the world. The tax will add to the already substantial costs for professionals choosing to work and raise families in London. This is bad news for London's long term economic prosperity and, therefore, the fortunes of the wider UK,’ Foxley added.
Nicholas Leeming, business development director of Zoopla described it as a tax on Londoners and added that the UK already imposes the highest property taxes in the world, as a proportion of GDP, with the top end of the market bearing the biggest burden.
‘This move will not only affect the wealthy but is likely to have an adverse impact on the entire property market. We’re likely see a slump in activity from buyers at the top level and this will have a knock on effect all the way down the chain. And whilst the government has stated that it wishes to crackdown on stamp duty avoidance schemes, this new rate is only likely to encourage the wealthy to find even more ways to avoid paying it. Unfortunately, the economics of this hike don’t measure up to the populist moves behind it,’ he said.
Richard Sexton, director of e.surv chartered surveyors, believes that it won’t be a policy that hits the housing market with any real force. ‘It is a way to raise revenue from property without rocking the foundations of the market. An extra £40,000 of stamp duty tax is an annoying inconvenience for wealthier buyers, rather than a serious repellent. The effect on the overall housing market will be nominal given how few people the tax effects,’ he said.
The move will send shockwaves through the rest of the sales market, according to David Whittaker, managing director of Mortgages For Business. ‘The prime level of the market has been one of the few parts of the sector functioning well but this hike threatens to sap its energy. All it will do is leave buyers in the middle of the ladder sandwiched between the feeble first time buyer market and a punished prime market. Not a situation we should intentionally be in when the market is in middle of a lacklustre recovery,’ he said.
